Sentient machines, neural laces, AI that can beat the
worlds best poker players. Wave after wave of developments and news about
automation, artificial intelligence, robots and the dawn of another industrial
revolution where "30% of human jobs in the next 15 years" will be
lost to inexorable developments within computing, on the apparent march towards
singularity.

It's easy to believe (and widely acknowledged) that the
first roles that'll be superseded by automation will be those at the unskilled
and lower skilled level; menial labour and simple jobs. With this in mind it's
inevitable that much of the forecast unemployment will occur within retail:
checkout, store replenishment, customer service agents, warehouse, amongst
others.

Many retailers employ vast labor forces, Walmart for
example, the largest private employer in the world employing 2.3 million people
and supporting millions of families. But what happens when these jobs can be
automated, the roles of 6 people can be carried out at the same cost as 1
person, do retailers jettison their workers and bring in software, machines and
artificial intelligence? What happens to all the people that are upended, will
they even be able to afford the products retailers are selling? Will the cost
reductions and operational efficiencies gained be translated into weaker
revenue?

I'm a firm believer in technologies that push society
from A to B, and I believe that automation is ineluctable and unemployment is
predestined. These are contentious issues and deserve another article in their
own right, but economies have always and will continue to solve complex
problems, including those posed by automation. To that end, I firmly believe
retailers should be pushing heavily into automation.

I'll start at store level where Amazon has seemingly
pioneered the first checkout-less store with Amazon Go, and other firms such as
Panasonic have demoed smart baskets where no humans are needed. Checkout is a
low hanging fruit where costs can be reduced for retailers, and time saved by
customers.

Retailers should be implementing ways that shoppers can
get in and out of the store without having to queue, or having to deal with
dysfunctional self-checkout machines. Autonomous checkout may be some ways away
from being perfect, but it's clear a centralised point of checkout does not
make for the smoothest shopping experience. Automated checkout is the end goal,
but by creating several checkout nodes around the store, the checkout process could
immediately be streamlined. Technologies, such as Oak Labs smart mirror, enable
the consumer to checkout in a changing room, for instance, creating a quick and
efficient experience.

It's 2017, and prices and product information in nearly
all stores are still displayed on printable paper as opposed to e-ink wireless
displays connected to systems that can regulate the price of products on the
fly. One of the reasons that brick and mortar is currently unsustainable is
because of the inability to quickly change product prices to compete with the
likes of Amazon. If prices were digitally merchandised, and to a greater
effect, automatically dynamically priced, causing retailers to become consistently
price competitive, consumers will enter the store knowing that they are getting
the best deal. This is one of the simpler, logical and inexpensive changes that
can have a profound effect on the ways products are merchandised.

One of the major areas where automation can drive
efficiencies and cost reduction is within the supply chain. Human bias touches
every part of the supply chain in areas such as buying, merchandising,
logistics, planning etc. Humans are not infallible, and more often that not,
outside factors; relationships, risk aversion, outside environmental factors
amongst others, have an impact on the decision making processes in the supply
chain. This is an area where automation can drive huge efficiencies and cost
savings.

Forecasting comes to mind as a mission critical tool for
stores. Too often this is done manually, by merchandise planners or
forecasters, and without the use of machines and algorithms. With the huge
amounts of data that retailers have on consumers' historical purchasing
behaviours, they should be able to generate models that accurately predict the
required quantities of product. More accurate forecasting, reduces the immense
costs associated with holding inventory and downside risk when a forecast is
incorrect.

One of the main areas of frustration for many people in
the retail world, is the process of product selection (for retailers selling
third party goods). Which product gets selected, why do they get picked, what
are the parameters? More often than not, it's a relationship play, with
existing suppliers and "halo" products getting picked over more
suitable products, smaller suppliers and products that may offer better margins
and/or a superior product. Once again, data is the game changer here, and retailers
should adopt software that allows them to granularly understand what the
consumer wants in a particular region and pick products based on quantifiable
metrics not a buyer's opinion. No more guessing games.

Automation will streamline the brick and mortar process,
allow them to cut costs and become more competitive, and enhance their product
selections, but there is a more pressing area that needs to be addressed for
retailers to have a chance at surviving the seismic shifts happening.

The Business Model

If we dissect a traditional brick and mortar P&L it
looks something like this:

You see revenue, followed by the cost of sales (goods),
closely followed by SG&A (Selling, General & Administration) expenses,
which covers things like employees, store costs etc. and then lastly a tiny
slither of profit (if any at all). The model I put together is primitive and
obviously there are other expenses to take into account, but the gist is that a
margin driven business model is not sustainable for both retailer and supplier.

The margin model relies on the concept that a supplier is
able to offer up margin in order for a retailer to cover it's expenses, and
then hopefully make money. It's a fairly reliable model, but it means retailers
have to push back to a supplier if they a) want to make more money or b) their
costs go up. It also relies on the assumption that a product will actually
sell, that there will consumer demand for it. Additionally, retailers
consistently charge for store space, a further cost to a supplier. Take Best
Buy, for example, who will charge 100's of thousands of dollars in order for a
supplier to be rolled out across all of their stores.

In addition, the brick and mortar model relies (mainly)
on the retailer buying inventory to stock their stores and paying for these
goods anywhere from 30-120 days after receipt. Huge cost outlays for a
retailer, something which requires precision forecasting and reliance on
product sell through.

When retailers miscalculate, mainly because their
forecasting is not good enough, or the price is no longer competitive, or an
overzealous purchasing decision has caused an excess inventory situation, the
system breaks down fairly quickly. In the short term, retailers move to
discount inventory, reducing their margins and in the long term suppliers will
normally bear the brunt of miscalculation, with retailers having watertight
overstock return clauses and the ability to withhold payment should discounting
not suffice.

My point: the margin model is fundamentally flawed and
needs to be adapted.

When price wars occur and the consumer habits change, how
can retailers reduce prices, whilst maintaining margin, whilst not driving
their suppliers into the ground? It doesn't work. The vast cost structures of
retailers put them at a severe disadvantage to the online world that are able
to run leaner enterprises.

Walmart recently held a summit with some of their largest
suppliers, mandating that as a business they want to be cheaper on 80% of
products than Amazon and therefore require 15% additional margin from a
supplier. Instead of innovating, cutting costs, implanting automation into
their ecosystem, they're pushing back even harder on the supplier. I feel this
will rapidly reach a breaking point, which will leave retailers with little
manoeuvrability and will continue to exacerbate the current situation.

Conversely, Amazon is hosting a conference in May with
the worlds leading CPG brands in a bid to cajole brands to reshape their
business models and to innovate with the current consumer trends. This would
involve shipping directly to consumers from their own warehouses, a world apart
from the current hub and spoke business model.

Retailers should be thinking outside of the box in search
of a new business model that is sustainable and can withstand these
socio-economic shifts. How can retailers create a model that's less sensitive
to shifts, generates more profit and returns margin back to the suppliers?
Subscriptions? Consignment? Stores within stores?

So, what should be the business model?

(I have my own ideas, but this ties into a project I'm
working on, and that would be a premature give away!)

I wanted to add an additional few observational
paragraphs on the effects the current market has had on the retail/supplier
relationship.

For onlookers, it's implied that there's a deep symbiosis
between retailers and their suppliers, one where both would look out for each
other to ensure the success of one another's business and work in harmony.

A utopian dream, right?

Unfortunately the supplier/retailer relationship has been
continuously degraded over the years, with retailers using power plays and
desperation in order to force suppliers into margin concessions, unfair
business terms and disproportionate demands, in order to prop up their ailing
businesses.

Payment terms have been increased to absurd amounts of
time, some as long as 6 months. Business terms such as the ability to withhold
payment if a product is not selling, or being able to return inventory at any
time, are crippling to small business.

Retailers act without recourse as they know that suppliers
need their channels to sell products, but as the tide turns and the market
shifts, there's a hope that the balance of these relationships can be reset.

In 2017, in the US alone there are expected to be close
to 10,000 store closures. Nearly 3000 stores already this year, from the likes
of Macy's, Sears, RadioShack, Sports Authority et al. Unprecedented, even
compared to the storm of 2008.

Retail is changing, and the volatility we're seeing now
is a result of the emergence and growth of Amazon and consumer behaviour
shifts, all of which incumbents have not been able to keep up with. I feel we
are only at the beginning of a purge where the weak will vanish and even the
strong will have more than a few battle scars. As has been demonstrated by
retailers, it's incredibly arduous to retrofit an old school solution with new
school philosophies and it's with this that I feel after the dust settles, we
will see an emergence of new players in the coming years. Ones that have been
built from the ground up with the centralised platforms, full automation and a
more robust business model.

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